July 12, 2005

Was Stoli Stolen?

By Bernice Yeung. Freelance writer Irina Slutsky assisted in reporting and translating.California Lawyer MagazineRussians love vodka.
A lot. In fact, it's so beloved that there's a word, zapoi, devoted to
its overuse. it means "binge" or "hard-drinking," a useful word in a
country that annually consumes an estimated 4 billion liters of
vodka-or about 35 bottles a year for every person in the country. A
little more than a decade ago the Russian government enjoyed a monopoly
on the product. That ended with the privatization reforms of President
Boris Yeltsin, a vodka lover himself. Since the reforms, the country's
most popular brands, including
Stolichnaya, known as Stoli, have ended up in the hands of an elusive
Russian entrepreneur, Yuri Shefler. Shefler controls the global
trademark rights to Stoli and other leading varieties. He also happens
to be wanted by the Russian government for allegedly threatening to
dismember a government official.

The Russian Federation is now involved in a protracted battle to
reclaim the Stolichnaya mark, which may be worth a billion dollars.
Last year the Russian government hired Quinn Emanuel Urquhart Oliver
& Hedges of Los Angeles, one of the country's foremost litigation
firms, to sue Shefler and his company, Spirits International, a
Curaçao-based subdivision of a Swiss company Shefler also controls. The
firm filed suit in federal court in New York's Southern District,
claiming Shefler stole the Stoli trademarks from the Russian people
during the country's shift to a market economy. The district court will
have to wade through complicated legal arguments, Russian politics, and
allegations of violence and extortion to determine whether Stoli was
stolen and, if so, who stole from whom.
Shefler, in turn, has hired his own heavy-hitting law firm, Covington
& Burling. Perhaps more important, he has enlisted the talents of
the influential lobbying law firm of Greenberg Traurig, whose
message-that its client is the latest victim of the Russian
government's efforts to renationalize the country's most profitable
industries-has won Shefler valuable allies in the White House and
Congress.
For all of his high-powered political maneuvering, Shef- ler has
arranged to keep a low profile. He has avoided the media and instructed
his attorneys not to talk about the case. David Quinto, one of the
Quinn Emanuel partners working on the case, says he does not know where
Shefler is. And the head of the Russian spirits industry association
insists that he doesn't even know what Shefler looks like. But one
thing is certain: In the mid-'90s, when Yuri Shefler saw an opportunity
to take control of the leading vodka brands, he was very available.
Stolichnaya, which translates as "of the capitol," is made from
filtered winter wheat and glacial water, and it has been a respected
vodka since it was first distilled in Moscow in 1953. Four years after
it was introduced to the United States in 1969, PepsiCo acquired the
American distribution rights in exchange for providing cola syrup to
the Soviets. Pepsi's marketing mavens-who began hawking the vodka as
the easier-to-pronounce "Stoli"-turned it into a top-shelf brand and a
martini favorite. Russian government control of the brand slipped away
when former prime minister Boris Yeltsin pushed for "shock therapy" for
the Russian economy, including privatization of government-run
industries, despite claims by critics that proper legal and government
systems had not yet been put in place. The privatization process
jokingly became known as prikhvatizatsiya, which sounds like "privatization" but means "grabfest."
Some government industries were overtaken by shrewd oligarchs, whereas
others fell into the hands of criminals with Russian mob ties,
exacerbating the growing divide between the rich and poor that still
plagues Russia today. It was during this time that Stolichnaya and
other liquor trademarks were transferred from a state-run import-export
company called Sojuzplodoimport to a new company with the same name
(which later, confusingly, became a company with a very similar name).
And this is where the dispute over the ownership of Stolichnaya vodka
begins.
According to an investigation by the Russian government launched in
2000, the head of Sojuzplodoimport, a man named Evgeniy Sorochkin,
attempted to pilfer the Stolichnaya marks by using forged government
documents to transfer the marks to a private company-supposedly
Sojuzplodoimport's successor-that he created in 1992. A few years
later, the government claims, Shefler snatched the Stolichnaya mark and
dozens of other marks from Sorochkin by transferring them to a series
of shell companies that Shefler controlled. In the end, the Russian
government insists, Shefler "sold" the trademarks-valued at about $400
million at the time-for a mere $300,000 to another company he ran. In
2001 American distribution rights were transferred from PepsiCo to
Allied Domecq, which is also a named defendant in the American
trademark suit.
The Russian government took Shef-ler to court in Russia over the rights
to Stolichnaya, and at the end of a two-year legal battle the Russian
high court returned the marks to the government. In 2002 the Russian
Federation began producing its own state-sanctioned version, which now
owns a 1 percent share of Russia's domestic market. With about 5,000
brands of vodka, Stoli is still popular in Russia according to Valery
Levin, head of the state-run company that produces it. (He adds that
the most popular brand, Putinka-named in honor of President Vladimir
Putin-has a 3 percent share of the market.)
But Russia's Stolichnaya can only be found in Russia. The country's
high court decision has had no impact on who controls the mark abroad,
where Shefler is regarded as the legal owner. To reclaim worldwide
ownership of the mark, the government must challenge Shefler or Spirits
International in each country that sells it. It has already sued in a
handful of them, including the United States, the Netherlands, Brazil,
and Australia.
Stoli's biggest market is the United States, where it is supposedly the
second most popular vodka brand. So it's here that Shefler's
Stolichnaya will be most vigorously challenged and defended. According
to the biography on Spirits International's website, Shefler was born
in 1967 in Orel, Russia, an industrial city southwest of Moscow located
on the Oka River. Though he studied at agricultural and engineering
trade schools, his talents clearly lay in business. As a young
entrepreneur he helped start Sadko Arkada, an exclusive shopping and
entertainment complex in Moscow, before joining the company's board of
directors. He eventually sold his shares to a Swiss company, which
helped him amass his fortune. Soon afterward he took on a new post as
chairman of the board of Vnukovski Airlines in 1995.
Over the years, Shefler developed financial interests in both real
estate and a television station, while participating in Russia's Union
of Right Forces Party, a procapitalist organization. Shefler is perhaps
best known for founding Spirits International, a massive
alcoholic-beverage exporting firm based in the Caribbean. The company
reportedly does about $700 million of business a year, and its ventures
range from finance to retail and wholesale operations. But it's the
management of dozens of Russian vodka trademarks-which allows it to
produce and export millions of liters of vodka each year-that generates
much of Spirit International's revenue. The Stolichnaya label is an
important part of its portfolio, reportedly accounting for an estimated
80 percent of Spirits International's vodka dealings.
Although there's disagreement about exactly how Shefler obtained the
Stolichnaya trademarks from Sorochkin, the minutes to a Moscow
shareholder meeting obtained by Quinn Emanuel's Quinto reveal that
Shefler took control of import-export company Sojuzplodoimport in 1997.
Most of the items on the meeting's agenda seemed mundane, but toward
the end of the meeting, Shefler, a relatively new shareholder, called
for the recall of the company's board members, followed by the
selection of a new president. "We, the shareholders, have no exact data
of the company financial situation," Shefler said, according to the
meeting minutes. "Staff change suggested by us is conducted exclusively
and only for the purposes of increasing the efficiency of the company
operation and it will enable us to restore the destroyed relations
between the company and each of its shareholders."
A new panel of directors was chosen, and Shefler was swiftly selected
as the new president, ousting Sorochkin by winning nearly 98 percent of
the vote. The Russian government believes that this was no coincidence.
The Russian Federation alleges in its investigation and in court
documents filed in a Netherlands case that, months before the vote,
various small shareholders of the company-ranging from primarily small
and unsophisticated agricultural co-ops to a major vodka
distillery-were supposedly compelled to relinquish their voting rights
to proxies, which Shefler then obtained. "Shefler is rumored to have
acquired the shares (and proxies) through threats and violence,"
according to one of the Netherlands court documents.
A few months after he took the helm of Sojuzplodoimport in 1997,
Shefler supposedly oversaw the incorporation of two companies. This
Russian joint venture was called Sojuzplodimport (spelled like the
original vodka import-export company, except for lacking the third
letter o). Shefler's brother-in-law headed the newly formed
Sojuzplodimport. A codefendant in the American lawsuit, Alexey Oliynik,
also took a leadership position within the organization.
In December 1997 Sojuzplodoimport (the original company) sold the
Stolichnaya marks and the marks of 16 additional vodka brands to
Sojuzplodimport (the new joint venture) for $300,000. In 1999 the
latter company then sold the rights for Stolichnaya to Spirits
International, the alcohol-export outfit founded and controlled by
Shefler, for an undisclosed amount.
By 2002 the Russian government charged Shefler with threatening to
dismember a government official who was running the new state agency
overseeing vodka exports. The government put out a warrant for
Shefler's arrest. After the charge was leveled, the company said
Russian investigators barged into the Moscow offices of Spirits
International in December 2002 and ordered the employees to lie on the
ground as investigators sifted through safes and bookcases,
confiscating accounting ledgers and computer disks. Just hours earlier,
agents had broken down the apartment door of the company's general
director and combed through documents stored there. In both searches
the government says it was looking for incriminating evidence related
to the alleged death threat. Spirits International, meanwhile, decried
the raids as a government campaign to harass and discredit Shefler and
the company. On its website it said, "The search has once more
confirmed the absence of 'rule of lawfulness' in Russia."
The Russian Federation, however, seems to think that Shefler's alleged
threat fits into a pattern of behavior. According to the complaint
filed in New York's Southern District, associates and competitors of
Shefler died under shady circumstances. Without specifically alleging
that Shefler committed murder, the Quinn Emanuel complaint lists a
series of suspicious events, such as the August 2002 murder of a
Russian vodka entrepreneur and Sojuzplodoimport shareholder who sued
Shefler to prevent the vodka magnate from transferring the Stolichnaya
mark from one company to the other.
In one of his rare interviews with the Russian press, Shefler was
nonchalant about the allegations against him. "I hide from no one, and
I have no intention of hiding," he said.
In the past few months, David Quinto has traveled to Russia twice to
search for witnesses and legal documents, which are not part of the
public record in Russia. Still, he's been able to hunt down a number of
documents-minutes from shareholders meetings of the various
incarnations of Sojuzplodoimport, contracts between the company and its
American distributors, the alleged forged letters that Sorochkin
created, and some bogus balance sheets that had supposedly been
doctored by Sorochkin.
Quinto believes these papers will help him prove that the Stolichnaya
mark has belonged to the Russian Federation all along. But to recover
worldwide ownership of it, he and the Russian government still face an
uphill battle. Unable to ship its version of Stolichnaya vodka outside
the country because of the trademark dispute, a distillery aligned with
the government has tried to register the mark "Stolnaya" in various
countries, conceivably, Spirits International says, as a way to export
the prized product under a similar brand name.
The Russian government has also registered the Stolichnaya mark with
the World Intellectual Property Organization in the hope that trademark
offices around the world will recognize Russia as the official owner of
the mark. But so far at least a half dozen countries have declined to
shift the ownership to Russia. The Russian government has also filed
lawsuits in several countries, though it has focused most of its
litigation energy on cases in the Netherlands and the United States,
the outcome of which may affect its litigation strategy elsewhere. "The
United States case is of massive significance," says Chris Brook-Carter
of just-drinks.com, an England-based international spirits industry
website. "Stoli is a global brand of great importance. Russia is one of
the world's most important producer markets, and the U.S. is the
world's most profitable spirits market."
In the end, the Russian government's most convincing legal argument may
focus on relatively mundane matters and not the allegations of
Shefler's fraud. In its filings, the government asserts that the
defendants have engaged in false advertising and unfair competition
because they advertise Stolichnaya as "Russian Vodka," and a "Product
of Russia" when the vodka is allegedly produced in Latvia. Spirits
International says its vodka is distilled in Russia, although the
Russian government disputes that claim. But both the alleged graft and
the Latvian connection are irrelevant, according to a motion to dismiss
filed by the Washington, D.C., office of Kenyon & Kenyon, which
represents the American distributor, Allied Domecq. "While the
ownership and control of the foreign trademarks and certain contractual
reversionary rights may be difficult at times to ascertain, the
ownership chain of the United States Stolichnaya trademark is clear,"
the motion states.
American legal experts agree. "The Russian government is going to have
to overcome that title of record to prove that in 1997 there was a
fraudulent transfer of the trademark," says J. Thomas McCarthy, a law
professor and the founding director of the University of San
Francisco's McCarthy Institute for Intellectual Property &
Technology Law. "It's going to be difficult, if not impossible."
In addition to a formidable legal defense, Shefler and his
representatives have exploited the current chill between the American
and Russian governments. In recent years the United States has
criticized the Putin administration's campaign to return the country's
largest industries to state control while selectively pursuing and
punishing certain oligarchs, like the imprisoned Mikhail Khodorkovsky
of Yukos Oil. With this tension as a backdrop, Shefler's defenders have
argued that he is yet another victim of Putin's renationalization
efforts.
In 2002 Shefler hired the lobbying law firm of Greenberg Traurig. A few
months later Richard Edlin, a partner at the firm, testified before the
U.S. Subcommittee on Trade of the House Committee on Ways and Means on
behalf of his client. "Russia now, acting solely out of its own desire
to take back property it has already privatized, has ignored its own
official actions during the privatization process," Edlin said. "We
ask: By what right?"
Edlin concluded by arguing that the vodka dispute could have some
international trade consequences: "Until Russia demonstrates that it is
willing to be a reliable member of the world economic community and
that it is willing to respect internationally accepted principles of
free trade, free markets, and private enterprise free from government
persecution, it should be denied normalization of trade relations and
admission to the WTO."
Soon after Edlin's testimony a number of mostly Republican senators
sent a letter to then-U.S. Trade Representative Robert Zoellick warning
that the Stolichnaya conflict casts "significant doubts on Russia's
ability to become a reliable member of the international economic
community." In July 2004 Congressman Tom Lantos (D-Calif.) continued to
express concern about the ongoing Stolichnaya dispute in a speech on
the House floor. According to the Russian press, the issue has even
been raised during private conversations between Putin and President
Bush.
Meanwhile, the case is more than a year away from trial, if it even
gets that far. In its motion to dismiss, Allied Domecq argues that it
has uncontested rights to the brand in the United States and that it
has had no role in the alleged theft of the trademarks.
Shefler and his attorneys haven't yet filed a response with the
American courts, and they've been unsurprisingly tight-lipped about the
lawsuit. One of Shefler's attorneys, Oscar Garibaldi, a Covington &
Burling partner, says that the multimillionaire vodka tycoon is living
in Geneva and has not yet decided on a media strategy. He also was not
interested in speaking publicly about the case. And though Garibaldi
has generally denied the allegations against his client, he said he had
been instructed not to comment directly on the suit.
But Garibaldi did agree to reveal one key piece of information about
the mysterious Yuri Shefler: He does occasionally enjoy a glass of his
own top-flight Stolichnaya Elit, and he likes to mix it with a little
champagne.

Bernice Yeung is an associate editor at California Lawyer. Freelance
writer Irina Slutsky assisted in the reporting and translating.